The million dollar question, what action will the ATO take when an ACR is lodged?

Sometimes we discover contraventions of the SIS Act and its regulations.

From there, we assess those contraventions against the ATO's reporting criteria and on occasion we will determine an Auditor Contravention Report needs to be lodged. The common question we receive from our clients is, what action will the ATO take in response to the lodged ACR?  This is not a question we can answer with any certainly so when a court case or AAT decision is released which provides insight into the ATO's response we certainly read it with interest. 

In the recent decision of FYYB v FC of T 2021 ATC 10-592; [2021] AATA 3567, the AAT affirmed the Commissioner's decision to impose a remitted administrative penalty of $7,500 on an SMSF for a breach of the borrowing restrictions found in section 67 of the SIS Act.

The facts outlined in the decision are that in early 2015, one of the members of the fund borrowed $220,000 from Westpac and on 26 March 2015, the same member lent $220,000 to the fund.  The AAT decision doesn't reference what the borrowing was for but we speculate it may have been for the acquisition of an asset using an LRBA with the related party borrowing not being correctly established.  The trustee of the fund accepted they had breached section 67(1) of the SIS Act.

Initially the Commissioner imposed penalties for three separate contraventions of s67(1) for each of 2015, 2016 and 2017 tax year totalling $31,800.  In determining the original penalties the Commissioner referred to the fund’s poor compliance record so far as lodgement of annual returns and other documents is concerned.  After that, I assume the trustee objected to the penalty and in response, the ATO remitted this penalty down to $7,500 on 11 July 2019.

In what we consider to be a surprising decision, the trustees incurred further costs taking the matter to the AAT in an attempt to have the administrative penalty remitted in full.

Some of the arguments given by the trustee as to why the penalty should be remitted in full included:

• Pointing to issues with their accountants - "the date of the enforceable undertaking was too ambitious due to the various exigencies of the accounting practice with which the Fund was associated and which later acquired the Fund, including staff turnover, the development of or the introduction of new software and so on. They might explain but do not excuse the contraventions."
• Pointing to problems created by the pandemic, though as the AAT noted, "but this matter arose well before the pandemic and in fact the enforceable undertaking was to be completed in November 2019, which was two or three months before the pandemic emerged."
• Referencing the significant costs that have been incurred in rectifying the contraventions.  However the AAT's responses was "but of course it is to be remembered that had the contraventions not occurred at all, those costs would not have been incurred at all."

In deciding to affirm the ATO's decision, the AAT noted the following:

• At the time of the hearing the contravention had still not been rectified, although the Fund had taken a number of steps towards fixing it. 
• In June 2019 an enforceable undertaking was entered into, which would have seen compliance completed by 1 November 2019.  The trustees did not adhere to the enforceable undertaking.

Due to affirmed ATO decision, the trustee was left with a $7,500 administrative penalty which seems appropriate in the circumstances. To reduce the likelihood of being penalised by the ATO for compliance breaches we encourage the following:

1. Where possible, rectify a contravention before the ACR is lodged.
2. Where rectifying before the lodgement is not possible, have a plan in place to rectify by a certain date.  We strongly encourage trustees that this not be more than 12 months from the date the ACR is lodged.
3. Achieve the reported rectification date as it will not be viewed favourably by the ATO if we have to report in a subsequent ACR that the previously advised rectification date was not met.

If you have any compliance issue questions, please do not hesitate to give us a call on 1300 04 SMSF (1300 047 673).